After more than a year of discussion, compromise and negotiation, the Securities and Exchange Commission enacted new rules yesterday to bring the municipal bond market into the modern age. The rules will provide investors with annual reports from municipalities -- just like corporate reports -- and make it easier for investors to get bond prices.
The changes are expected to have a profound effect on the $1.2 trillion municipal bond market, where the nation's cities and towns raise money. Once the rules are in place, they could encourage more investors to buy municipal bonds, lower the borrowing costs to municipalities and save taxpayer dollars.
"It's terrific," said R. Fenn Putman, chairman of the Public Securities Association, the industry trade group. "These are very workable and useful proposals that will increase the information flow, liquidity and investor confidence."
The changes are intended to bring to the municipal bond market a level of financial disclosure about prices and bond quality that is common in the corporate stock and bond markets but still is not available to buyers of tax-free municipal securities.
Specifically, the SEC will require municipalities, starting in 1996, to issue annual financial reports and, immediately, to make public reports of any important changes in their financial condition.
Starting next July, Wall Street will not be allowed to underwrite municipal bonds unless municipalities have pledged to provide these disclosures.
"My hope is that the municipal bond market will look more and more like an open market," said Arthur Levitt Jr., chairman of the SEC.
The SEC, however, backed away from a proposal to require all bond dealers and traders to review financial information before selling a bond. The municipal bond industry had objected, complaining that traders would be subject to regulations that would slow trading and reduce market liquidity.